BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers.* Our business encompasses BNY Mellon’s affiliated investment management firms, wealth management services, and global distribution companies. We combine the scale of a full-service investment manager with the focused expertise of autonomous investment boutiques, each with their own style, strategy and management team. Please visit the Investment Management site to learn more.

Rightsourcing

Changing dynamics in investment management and related operations have driven some asset owners to add new asset classes to their internal mix, while others choose to outsource the associated investment operations.

Of those asset owners that have brought asset management in-house, many believe that they can achieve the dual benefit of cost savings and better investment returns. Importantly, the decision to insource is not always combined with a desire to bring middle-office functions in-house. In fact, many asset owners view the operations of asset management as complex and technologically challenging.

The majority of the firms surveyed continue to outsource their asset management strategies and cite satisfaction with the performance of their external managers and the ability to scale their businesses as chief reasons.

The survey, which involved 245 U.S. and international asset owners, shows that the insourcing trend has grown recently:

46% of asset owners that manage assets internally increased their proportion of in-house-managed assets in the last two years

28% of these asset owners say they will increase this proportion further in the next two years; 24% remain undecided

25% of asset owners that insource manage over 50% of their portfolio in-house

40% of public pension funds surveyed manage assets internally, compared with 32% of endowments and foundations and 19% of corporate pension funds

41% of asset owners that insource say they expect to outsource some or all of their middle-office functions at some point

Larger asset owners are more likely to manage assets in-house:

58% of asset owners with assets in excess of $25 billion manage some assets in-house

26% of asset owners with assets of less than $25 billion manage some assets internally

But the majority of firms will continue to outsource:

67% of those responding choose not to insource, across all sizes and types of asset owner

63% cite satisfaction with the performance of external asset managers as a reason not to bring asset management in-house

45% felt they did not have sufficient scale to commit to in-house management

Of those who outsource, only 2.4% will insource in the next 24 months; 8.5% are unsure

Introduction

Highlights

Insourcing investors are looking for a more transparent and holistic view of their portfolio, whether part or all of the assets are managed in-house.

Investors who insource cite better risk-adjusted returns and risk management as a result.

Large institutions start by insourcing the easier-to-manage asset classes such as cash and fixed income, before considering other asset classes.

A majority of asset owners do and will continue to outsource their asset management in the future, citing satisfaction with external managers as the primary reason.

Smaller asset owners – those with under $1 billion assets – are more likely to outsource asset management as they do not believe they have the scale to support in-house management.

Certain back- and middle-office functions have become so complex and subject to rapidly changing regulatory and reporting demands that many asset owners that choose to insource investment management now are choosing to outsource such components in the future.

It’s a trend that may seem counterintuitive: Many large asset owners are reviewing their external asset management and considering expansion of their in-house investing capability. The reasons for this move are largely philosophical and a reaction to the lack of control many asset owners experienced during the financial crisis. For some, a tradition of in-house investment management has been expanded to include additional asset classes; for others, the lower cost of in-house management has contributed to better risk-adjusted returns over time.

Exhibit 1

Exhibit 2 Internal Management by Asset Class Cash and fixed income are the most common asset classes managed in-house across the size spectrum, though over two-thirds of large asset owners manage equities and alternatives in-house

The nature of “rightsourcing” has and is continuing to evolve, as asset owners look to develop new kinds of collaborative arrangements with outside asset managers that blur the lines between internal and external management, while at the same time seek to outsource additional middle office and technical support functions. Asset owners are identifying areas where insourcing can add value and where it can’t.

The largest asset owners are the most likely to insource investment management, with 58% of those with portfolios over $25 billion among the 245 U.S. and international asset owners surveyed managing assets in-house. The survey results indicate that of these larger asset owners, public pension funds are more likely to insource than corporate pension funds, or endowments and foundations.

Overall, a quarter of asset owners that insource manage over 50% of their portfolio in-house. Cash and fixed income are the asset classes most likely to be managed internally: 79% of asset owners that insource manage cash and 80% manage fixed income. For the largest institutions, equities and alternatives are also common areas for insourcing, with 79% of asset owners with $25 billion or more managing some equities and 68% managing some alternatives internally.

“Insourcing investors are looking for a more transparent and holistic view of their portfolio, whether part or all of the assets are managed in-house.”

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of Dec. 31, 2015, BNY Mellon had $28.9 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com. Follow us on Twitter @BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for the latest company news.

Philip J. Falivene

Managing Director, Head of Public and Not-for-Profit Global Client Management, BNY Mellon

Philip Falivene is Managing Director, Head of Public and Not-for-Profit Global Client Management at BNY Mellon. In this role, Phil has leadership responsibility for a team of client executives responsible for the management and development of relationships with strategic clients and prospects delivering the breadth of the company’s investment management and investment servicing insights and solutions. Clients are represented by state and local government agencies, municipalities, endowments, public funds, and other non-profit institutions.